Piketty on "merit"

One thing I noticed while reading Thomas Piketty's new book was the topics that were not covered; progressive consumption taxes, Singapore (or indeed any of the 4 Asian "tiger economies"), and the link (if any) between ethnicity and great wealth. In an earlier post I discussed progressive consumption taxes---here I'll focus on ethnicity.

Piketty is quite dismissive of the idea that great wealth and/or high incomes are generally associated with "merit" (or productivity, the term I prefer.) He tends to emphasize that many of the very wealthy have inherited their fortune. Or that out-sized CEO pay packages are not closely linked to productivity. Indeed this is a theme Piketty repeats frequently. Others have had doubts about this CEO claim, noting that elite pay has also risen rapidly in areas where incomes are clearly linked to productivity, such as managing hedge funds. A paper by Steven Kaplan and Joshua Rauh contrasts the Piketty argument with the productivity argument, and concludes:

Our results tend to support the second broad category of explanations more than the first. For example, one version of the managerial power or extraction hypothesis argues that corporate governance has deteriorated in a way that allows top executives to have increased their compensation substantially (Bebchuk and Fried (2004). But our evidence suggests that poor corporate governance cannot be more than a small part of the picture of increasing income inequality, even at the very upper end of the distribution other groups that do not report to a potentially compliant board of directors, particularly private company executives, have experienced equal or larger increases in their contribution to the top income brackets. Furthermore, the Forbes 400 lists include virtually no public company chief executives who are not founders or who became the chief executive officer after the company went public.

Interestingly, I don't recall any Piketty reviews discussing the role of ethnicity and great wealth. One of the wealthiest people in the world is Mexican telecom owner Carlos Slim, who is of Lebanese descent (a fairly small minority in a mostly Hispanic culture.) In many Southeast Asian nations the wealth is disproportionately owned by a relatively small group of Chinese immigrants. America has many examples of immigrant success, perhaps none more famous than Jewish immigrants from Europe.

According to Forbes, of the 40 Americans with more than $10 billion in wealth, 12 are Jewish. (And a 13th was described as Russian-American.) So it looks like about 30% of the very rich in America are Jewish. I couldn't find data on the proportion of all US billionaires that were Jewish, but some sources suggested roughly 25%. (The global figures seems closer to 11% of all billionaires being Jewish, although of course Jews make up a much smaller share of the global population that the US population. Roughly 0.2% globally vs. 2.0% in the US.)

Even accounting for data problems (what counts as Jewish when there is intermarriage?) it looks like Jewish immigrants to American have been considerably more successful than average. What does any of this have to do with Piketty's book? Very possibly nothing. However given that Piketty is quite dismissive of the idea that great wealth and/or high incomes are associated with "merit", I wonder what would be the Piketty explanation of ethnic differences in wealth. One factor might be discrimination, but that doesn't seem to apply to cases where small immigrant communities have done very well---indeed they often face adverse discrimination, just the opposite of what you would expect.

It seems to me that the most straightforward explanation for the success of minority immigrant groups is high productivity. And it's not hard to find independent evidence of for that hypothesis. For instance, about 25% of Ivy League students are Jewish. That suggests that the proportion of highly talented students in America who are Jewish is roughly equal to the proportion that are billionaires. There is also evidence of high achievement in education among Chinese immigrants to America, which might have some bearing on their success in other parts of the world.

Now in fairness to Piketty I think one could construct a plausible theory explaining over-representation of certain immigrants groups among the very wealthy, which does not involve a productivity story. Even Piketty would (presumably) not attribute business success to random luck. I am quite certain that I don't have the skills required to be a CEO, for instance, even if CEOs are grossly overpaid. And of course he does view the inheritance channel to wealth as representing the luck of being born into the right family.

If I could hazard a guess, it might be that the lack of discussion of ethnicity in the Piketty debate might partly reflect the fact that explanations of disproportionate ethnic success that are not merit-based might seem slightly non-PC. I'm not sure that would be fair to those on the other side---my own view is that we have become so sensitive to these issues (mostly a good thing!) that the charge of prejudice is somewhat overused in contemporary American intellectual debates. Still, I feel slightly better finding myself on the "merit" side of the question of ethnic success, than having to defend some sort of non-merit theory of disproportionate ethnic success (where discrimination is clearly not the deciding factor.)

I think this relates to a point that Tyler Cowen has made. If we think of billionaires as faceless people, it has somewhat different implications for our sympathy than if we think of them as plucky immigrants that have historically faced discrimination and who triumphed against great odds. As always in economics, framing effects get in the way of clear thinking.

Comments and Sharing

What economics-relevant assertion is more blatantly true than that ethnicities are *unequal* in their productivity?

And yet PC is so effective that Piketty can skip the topic entirely, with out notice, in a book on *inequality*.

There's nothing more absurd than passionate argument about hard but unimportant questions like minor tinkering with the top marginal tax rate, with simultaneous neglect of relatively easy and massively important facts like ethnic differences.

I don't want to speak for our good blogger, but I don't think he means that some ethnicity are more productive than others. Rather, I'd guess that within a minority group of immigrants you are going to have a very small percentage of them REALLY rise to their occasion, be very ambitious, and rise to the very top in greater proportion than we'd otherwise expect.

With the large improvements in information technology and the substantial
increase in value of the securities markets over the last 30 years, skilled individuals can now apply their talent to much larger pools of capital. The changes in the composition of the wealthiest individuals in the United States suggest that these trends are shaping wealth more than they used to, while being born to extensive wealth and inheriting family businesses have become less important.

Speaking of Picketty and ethnicity and immigration I am confronted with a thought: The recent surge in immigration must surely be increasing income inequality in the United States. I have no doubt that most of these immigrants will become productive members of our society.

Doesn't the story of immigration, generation after generation, put to shame Picketty's vision of an ossified and unequal society?

Danny, I don't like the term 'merit,' but I see your point. I certainly believe some success is linked to productivity and some isn't. But I also believe that the question of whether wealth is "merited" is very different from whether it is linked to productivity.

One oddity of Piketty's thinking is that he's convinced he can't trust published lists of the superrich, like the Forbes lists of billionaires, because there _must_ be vast troves of Old Money inherited wealth hidden away where mere journalists can never ever find it. Piketty doesn't give any example in support of his conspiracy theory, but the name that always comes up first among Piketty's fellow conspiracy theorist who don't believe the published rankings is the Rothschilds.

I consider ways to think about Piketty's theory of Secret Billionaires here and here:

"I couldn't find data on the proportion of all US billionaires that were Jewish, but some sources suggested roughly 25%."

Jewish publications, such as Forbes Israel and the Jewish Telegraph Agency wire service, pay much attention to this question. But currently the most careful source is social science blogger race/history/evolution notes. He finds about 35% of U.S. Forbes 400 members are at least half Jewish. This appears to be up substantially from Nathaniel Weyl's estimate of 22% of the 1987 Forbes 400 being Jewish. (But there's a lot of churn in the Forbes 400 from year to year, so single data points from the past shouldn't be assumed to be highly representative of the past.)

I review the data quality of the various list of Jewish billionaires here:

I really like your preference for the term productivity over merit; the latter is too loaded a term. I think, though, that productivity is not quite enough. One could imagine an economy where productivity doesn't correlate we'll with income. The key is having a productivity-rewarding society. Most of the evidence suggests that the U.S. Is one the best at that. Far from being unequal because of wealth hoarding and rent seeking, the distribution of income and economic mobility is best explained by models that assume returns almost solely to productivity. This reality is what Piketty and many on the left either can't see or won't accept.

yes, the idea is that some ethnicities are more productive than others, with a consistency across time and space. for a (relatively unloaded) example, overseas chinese economically wallop natives across all of indochina. often despite discrimination.

if you can't see that productivity varies by ethnicity, and that this is evidence that productivity matters for income, then political correctness has dumbed ya down.

In college, I took a class from Ken Jowitt in which he hypothesized that people on the edges of social groups were more likely to be stand-outs. I'm not quite remembering all of the theory because it was so long ago. He used it in part to explain the nature of "movements of rage" that arose in traditional areas after sudden exposure to modern ways. (Traditional and modern have special meanings for him. It doesn't have anything to do with technology, for example.)

What I recall is that he thought it predictable that people on these margins would respond in more extreme ways, but that the particular ways could not be easily predicted. For example, in the 80's, he was thinking that he saw the early indications of a rage movement in parts of Africa.

The application here would be that distinct ethnic minorities might also he highly aware of the margins of society, between their ethic society and the broader society in which is it submerged. It could help explain both Jews in America and Chinese in southeast Asia.

It always seemed untestable to me -- exactly what would falsify this theory? But it's an interesting construct.

Productivity is a bit of a catch-all term, but trust and reputation networks are an important feature of minority wealth-success, particularly in low trust societies.

Which goes back to the point that, from comments folk make (I haven't read the book) risk does not seem to feature prominently in Piketty's analysis. (Possibly a throwback to Marx, whose analysis has the same problem.) Yet risk-management is a the heart of a lot of commercial arrangements. Starting with why firms are owned by capital--the capital put up by the owners covers the variability risk of the firm. Labour typically cannot manage that. Even partnerships, which look a bit like labour-owned firms, are really capital-owned ones.

Since Piketty is a mainstream economist and the ideal economy in mainstream economics is the perfect competition model, I think Piketty would say that CEO pay is the result of unfair monopoly power, as in monopolistic competition. Like most mainstream economists, he thinks the state should correct market "failures" and the unfairness of monopolistic competition.

Rawls fabricated the idea that unearned wealth is unfair and a lot of people bought that nonsense. Through most of history people thought chance wealth, like that gotten by gambling, was the most fair because everyone had the same chance of getting it. See Schoeck's "Envy."

Inherited wealth is no different from winnings through gambling. It's chance. The one inheriting the wealth did nothing for it and had no choice of his parents.

Piketty is obsessed with inherited wealth, but maybe for good reasons. It seems that he showed that as much as 80% of wealthy people in Europe inherited it. He doesn't include US stats for some reason, but from Dr. Tom Stanley's work I recall that only 3% of US wealthy inherited their wealth. Maybe Stanley and Piketty use different methods for assigning inheritance; I don't know.

But if the differences in inherited wealth between the US and Europe is that great there is something wrong in Europe and Piketty is right to be concerned. He needs to find out why it's so high. My guess is that Europeans make it much harder to start new businesses, which is the source of 85% of American wealth.

Earned or accidental wealth should never concern us. What should is rent seeking by large corporations. Massive regulation does little more than create rents for corporations, while inflationary monetary policies provide rents for the wealthy and financially connected.

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